To continue on with the First Time Home Buyer series from last week, I’d like to talk a little about the down payment required for the first time home buyer. There are many options available in Canada for down payments, but the general rule of thumb is, the higher your down payment, the less you pay in terms of fees to obtain your mortgage.

Canada Mortgage and Housing Corporation (CMHC)

You’ve probably heard of CMHC insurance, which is the insurance given to banks so that they can lend to borrowers with less 25% down with reduced risk. Remember, you, the borrower pays for CMHC (<25% down), but the bank benefits. The extra premium does not insure the borrower what so ever. In addition to the CMHC fee, there typically an application fee.

Here are the CMHC fees by level of down payment:

% Down CMHC Fee Cost/$100k Mtg
5% 2.75% $2,750
10% 2.00% $2,000
15% 1.75% $1,750
20% 1.00% $1,000
25% $0 $0

There is a handy mortgage qualifer web based calcultor on Dinky town that accounts for CMHC etc. A useful tool for those in the real estate market.

Needless to say, the more cash you have for your down payment, the lower your fees! Perhaps a prudent plan for a new grad is to maximize your RRSP, when you get $20,000 accumulated, use the RRSP Home Buyers Plan for the down payment.

I’ve recently read that the Canadian government is in the process of passing legislation that will reduce the minimum down payment required to avoid the CMHC fees from 25% -> 20%. According to CBC, this legislation took into effect Friday April 20, 2007, so my above numbers may not be accurate. I will be posting more about the new down payment rules tomorrow.


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